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3. The DEF Corporation is trying to decide whether to undertake an expansion of its production facilities. The expansion will cost $8.5 million, to be
3. The DEF Corporation is trying to decide whether to undertake an expansion of its production facilities. The expansion will cost $8.5 million, to be paid immediately. After tax cash flows generated by the expansion are projected to be $1 million next year, and will be growing indefinitely with inflation at 2.5% per year. Assume the cost of capital of 12%. Should DEF undertake the expansion? (16 Points) I 4. Company Y reinvests 40% of its earnings and has an ROE of 25%. This is expected to last forever. It has 5 million shares outstanding. The required return is 15%. a) How fast will the firm grow? (8 Points) b) Last year's earnings were $10 million. Just before the dividend payment of $6 million, what should the stock price be? (8 Points)
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